January 07,2018
Economist Tarron Khemraj says his computations show that Guyana’s signing bonus from ExxonMobil should have been around US$238 million and not the US$18 million paid.
Khemraj, the current Sunday Stabroek business page columnist, has written extensively in this newspaper about development issues. In his column, which appears on page 12 in today’s edition, Khemraj said there appears to be no universal methodology for determining the fair value of the bonus and that it depends on the negotiating demands of the lessor versus the oil company.
He, however, said there are some general economic principles applicable and these include risk variables, such as a radical change in regulation, nationalization and regional conflict. The marginal cost of production, the time taken to recoup the initial investment, and the average cost thereafter can also determine the size of the signing bonus. Finally, the expected or long-term market price must also be taken into account.
Considering two important factors, he said that ExxonMobil spent an enormous amount of money to explore for oil and develop the production platform. He said that if consideration is taken of publicly available data, and those from the recent International Monetary Fund report, the cost of exploration and development from 2015 to 2020 is running at over US$5 billion.
“Second, we have a time value of money problem with the exploration costs occurring from 2015 to after 2020 given the `unrisk exploration upside’ to use industry lingo. Moreover, given the size of the Stabroek block, we can expect explorations and new developments after 2020, thereby incurring added costs for ExxonMobil. As with all time value problems, we need a suitable discount rate to find the present value of explorations and development as at 2015-16 when the Guyana government negotiated the updated production sharing agreement. The discount rate can be the risk-free rate of interest plus some opportunity cost associated with ExxonMobil’s next best explorations in some other part of the world. It should be noted, the ring-fencing of cost is not necessarily applicable here when determining the fair value of the bonus, but it is most relevant to determining the true average cost during the production stage,” Khemraj stated.
Given his calculation, he said that a signing bonus of around US$238 million seems appropriate. “This value imagines that I am in the latter months of 2015 to put myself in the shoes of the negotiators. If we consider new information released since November of 2017, the bonus is much higher. This amount of money can build a fantastic bridge across the Demerara River, freeing up funds which will be borrowed for the new bridge,” Khemraj said.
He added that in coming up with the number, he tried not to be unreasonable so as to adversely affect the publicly available internal rate of return of the project. He stated that one other methodology that Guyana could have used was to consider a percentage of the present value of expected revenues projected.
“Unfortunately, it does not appear that financial economists and managerial accountants were on the government’s negotiating team. These kinds of problems are not only legal and geological in nature, but also economic. As a matter of fact, it appears as though the Guyana government does not even know – under some reasonable assumptions – what’s the net present value of the project or the present value of all revenues. The government relies on the IMF and IDB, which no doubt have some fine technicians outside of the macroeconomics of developing countries. However, unless you can get the IMF and IDB people in the negotiating room, their help is limited,” he stated.
Further, Khemraj argued that having access to the IMF or IDB is no excuse for not having this kind of multidisciplinary capacity in government on a daily basis.
“In a sense, the sacrifice to date of failing to have a multidisciplinary and more diverse team in government is that bridge across the Demerara River!,” he declared.
Khemraj’s assertion will add to the growing concern that the government was overwhelmed in the negotiations by ExxonMobil.
Yesterday, the Private Sector Commission pointed to deficiencies in the petroleum agreement and called for better negotiators for future contracts. (See story on page 11)
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